12 June 2013

Can we still invest in downtrend market?

While I am not a technical analysis (TA) expert, I still understand that investing in downtrend market is similar to catching a falling knife - sounds dangerous. And many TA experts would suggest us to set a cut loss point when it's in downtrend and enter back the market when the uptrend is formed.

Well, I only believe in the term "Price is what you paid and Value is what you get". If you buy a counter that you think is undervalued at that point of time, there is impossible for you not to think of buying more when the stock dropped by 20% or more than your last entry price.

It's not easy for us to calculate the intrinsic value of each stock, as most analysts in the market are using "Relative" method by comparing the stock price among peers. They may make a "buy" call when the counter's PE/PB ration is lower than peers. When the whole market is dropping, the analysts would suggest higher return due to so called high beta / volatility, but when the market is in uptrend, the analysts could even reduce the "rate of required return" due to low volatility?!?

Some analysts may use the comparison with its own previous performance on PB/PE ratio. This is an easier way to figure out the counters in mature stage but not for cyclical / growing stocks as PB/PE ratio may not be a good value indicator for those stocks.

Anyway, I think there is always no fixed magic formula to retrieve the real value of the counter. You will always experience the up and down of the share price. What we can do is just do nothing when market is hot and start collecting good quality stocks when nobody wants to enter the market due to the fear of unrealized gain in paper, like they forget the famous quote "Price is what you paid, Value is what you get". The value is always there, no matter how much stock quote is.

For long term investment using excess cash, I believe we can start finding hidden gem(s) as current Singapore stock market drops by more 10% to below the year beginning value. It's time for us to do more homework to collect valuable assets. We can enjoy the fruits in later years. I still believe that we can enjoy a good return investing in equity market, as it is my most favorite asset class.

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